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Bailey's Measure of the Welfare Costs of Inflation as a General-Equilibrium Measure

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  • RUBENS PENHA CYSNE

Abstract

Lucas (2000) has shown that Bailey's formula for the welfare costs of inflation can be regarded as an approximation to the general-equilibrium measures that emerge from the Sidrauski and the shopping-time models. In this paper we show that Bailey's measure can be exactly obtained in the Sidrauski general-equilibrium framework under the assumption of quasilinear preferences. The result, based on whether or not wealth effects are incorporated into the analysis, is also helpful in clarifying why Lucas' measure derived from the Sidrauski model turns out to be an upper bound to Bailey's. Two examples are used to illustrate the main conclusions. Copyright (c) 2009 The Ohio State University.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 41 (2009)
Issue (Month): 2-3 (03)
Pages: 451-459

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Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:2-3:p:451-459

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Calza Alessandro & Zaghini Andrea, 2011. "Welfare Costs of Inflation and the Circulation of U.S. Currency Abroad," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-21, May.
  2. Cysne, Rubens Penha, 2011. "The n-dimensional Bailey–Divisia measure as a general-equilibrium measure of the welfare costs of inflation," Economics Letters, Elsevier, vol. 113(2), pages 99-102.
  3. Etienne B. Yehoue, 2012. "On Price Stability and Welfare," IMF Working Papers 12/189, International Monetary Fund.

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